New paper: “The Euro Interbank Repo Market”

We finalized a first complete draft for a new paper titled “The Euro Interbank Repo Market”. The repo market is an important part of the shadow banking system. Using a novel and comprehensive dataset from an electronic trading platform, we provide the first systematic study of the euro interbank repo market. We document the evolution of repo market activity and identify risk and central bank liquidity provisions as the main state variables. In contrast to repo markets in the United States, we find that the bilateral central counterparty-based segment was resilient during 2006-13, which includes severe crisis periods. An increase in risk significantly increases repo trading volume, but has virtually no effect on repo rates, average maturity, and haircuts. Moreover, volume in the unsecured market is negatively related to repo volume. This suggests that, under certain conditions, banks use the repo market as a means of liquidity hoarding. The euro repo market infrastructure, including anonymous trading via a central counterparty, exclusive reliance on safe collateral, and reusability of collateral, appear to be key characteristics that render the market resilient.

The paper is available on SSRN.